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A New Playbook for Emerging from Bankruptcy

March 12, 2024

By Omar Aguilar, Robert Del Genio, and Christopher Ittner

Many companies that emerge from bankruptcy continue to struggle competitively. To fix this problem, companies need a new approach to emergence planning that addresses the full range of business dimensions – capital, cost, growth, technology, and talent – not just capital structure remedies, which has traditionally been the primary focus during restructuring.

The bankruptcy process arguably is broken. Although most businesses survive bankruptcy in one form or another, far too many continue struggling after emergence, slogging along with subpar performance and often filing for bankruptcy again within a few years.

Bankruptcy is a formal process geared toward preserving stakeholder value, and the proceedings often include arduous negotiations between stakeholders that are time-consuming and expensive, with limited attention on enhancing post-emergence performance. As such, the top priority has traditionally been on completing the process, rather than positioning the bankrupt company for transformational growth upon emergence.

This limited focus is certainly understandable, given all the pressures and constraints that accompany bankruptcy, particularly as prepackaged and prearranged bankruptcies become more common. (In many cases, prepackaged and prearranged bankruptcies primarily focus on solving capital structure challenges, with less attention paid to operational changes to the business.)

However, some of the constraints that companies operate under during bankruptcy may be self-imposed or driven by conflicting priorities that restrict management’s options, limiting an emergent company’s ability to grow and thrive post-bankruptcy.

Needed: A New Approach to Emergence Planning

Bankruptcy filings rose sharply during the global COVID-19 pandemic and seem likely to rise again as companies face the looming prospect of a recession. Financial market solutions and stimulus packages that kept many businesses afloat during the pandemic can no longer be counted on. Meanwhile, inflation is running rampant, driving up material and labour costs, reducing customer demand, and prompting central banks to implement restrictive monetary policy choices that will be painful for their economies. Factor in ongoing supply disruptions triggered by COVID-19 and exacerbated by the Ukraine war and global climate events (including historic heatwaves and floods), and the result is a highly challenging business environment for companies struggling to remain solvent.

With an acceleration of bankruptcies on the horizon, it is time to rethink how companies approach the bankruptcy process and focus increased attention on helping them become viable businesses post-emergence.

To shine a light on the critical need for more-effective emergence planning, we recently conducted an in-depth market survey of senior executives at companies that are currently in bankruptcy or recently emerged.1 In conjunction with the survey, we also analysed the overall bankruptcy landscape and developed a practical playbook to help companies design and execute successful emergence strategies that address all the key performance dimensions necessary to achieve profitable and sustainable growth after bankruptcy – not just capital structure fixes.

The data-driven and fact-based insights presented herein are intended to inform all stakeholders about the emergence opportunities following bankruptcy. However, since the needs and available actions for different stakeholders are varied and nuanced – and sometimes conflicting – we offer relevant insights for the full range of stakeholders, including, but not limited to, affected companies and their management teams and boards, lawyers and other advisors, lenders and other creditors, and private equity and fund teams.

Bankruptcy Landscape Analysis

In the United States between January 2019 and May 2021, there were 665 bankruptcies in which the company chose not to liquidate its assets and cease doing business. Our in-depth analysis focused on a subset of 358 bankruptcies with liabilities of at least $50 million at filing. This liability threshold was chosen to provide insights about larger companies with more complex businesses, capital structures, and scale.

With an acceleration of bankruptcies on the horizon, it is time to rethink how companies approach the bankruptcy process and focus increased attention on helping them become viable businesses post-emergence.

The vast majority of businesses in our analysis successfully emerged from bankruptcy, most as private companies. Of the 134 bankruptcy cases that were confirmed or closed from January 2019 through May 2021, 88 per cent of the underlying companies successfully emerged. Among those companies, 75 per cent emerged as privately owned companies and 13 per cent emerged as public companies. However, our research also found that many companies suffer from subpar performance after emerging from bankruptcy, and a significant number are forced into bankruptcy multiple times. In addition, a recent study found that investment returns on post-reorganisation equity have declined substantially over the past decade, meaning that companies emerging from bankruptcy must now work even harder to continue attracting investors.2

Prepackaged, prearranged and pre-negotiated bankruptcies (collectively referred to here as “pre-filings”) increased markedly from 2019 to 2020. Pre-filings accelerate the bankruptcy process and shorten timelines, making it especially important for companies to develop a pre-filing strategy and operating plan to achieve profitable and sustainable growth upon emergence.

Emergence Market Survey

To gain real-world, quantifiable insights about the bankruptcy process and how companies are planning to grow and thrive post-emergence, we conducted a market survey of 50 business leaders from large companies with direct experience of going through bankruptcy. Many of the survey questions focused on the five core business dimensions of capital, cost, growth, technology, and talent – and how those dimensions related to the bankruptcy process. Our survey was representative of the market studied and is estimated to have a 13 per cent margin of error at a 95 per cent confidence interval, indicating that the results from the survey are statistically significant.

The three top reasons (not mutually exclusive) for bankruptcy filings were debt maturities or interest payments (64 per cent), sales and supply chain problems due to COVID-19 (48 per cent), and liquidity issues (32 per cent) – all of which had links to the global pandemic. However, many bankruptcies were not directly attributable to COVID-19, with the pandemic simply accelerating disruptive market trends and outcomes that were likely to occur anyway.

Capital is the primary focus during bankruptcy. Capital structure realignment was the top priority for the majority of respondents (56 per cent), followed by cost reduction (34 per cent).

Most respondents believe they are not fully prepared for post-bankruptcy success.

Many bankruptcies were not directly attributable to COVID-19, with the pandemic simply accelerating disruptive market trends and outcomes that were likely to occur anyway.

According to the survey, respondents were least likely to be substantially prepared for post-bankruptcy success on the dimension of technology (14 per cent). The other four dimensions scored higher: capital (32 per cent), growth (28 per cent), talent (26 per cent), and cost (22 per cent). The speed of the bankruptcy process likely hampers the ability to address these topics – all the more reason for the board and management to focus on these dimensions in a post-bankruptcy period to position the organisation for accelerated transformational growth.

Other important business issues are often not meaningfully addressed.
Looking beyond the five core dimensions, nearly half of respondents (44 per cent) did not feel they were able to meaningfully focus on other important business issues during the bankruptcy process, a fact that may limit their ability to thrive after emerging from bankruptcy.

Post-bankruptcy capital structures tend to be burdensome.
Over seven out of 10 respondents (72 per cent) felt their post-bankruptcy capital structure was at least somewhat burdensome, and roughly one in four considered it to be onerous or an inhibitor to growth. Many companies remain highly leveraged on emergence, despite having realigned their capital structures during the bankruptcy process. As these companies continue to improve financial performance, they can enhance their ability to pursue post-bankruptcy refinancing.

Cost reduction is not aggressively addressed – especially strategic cost reduction.
The survey results show that during bankruptcy only 12 per cent of respondents aggressively addressed structural cost issues, such as defining a new operating model, that could have helped them achieve a scalable and sustainable cost structure.

The top targets for full outsourcing are technology/IT and marketing/advertising.
During or after bankruptcy, the business areas that were most often fully outsourced were technology/IT and marketing/advertising. Areas that were most often partially outsourced were marketing/advertising, sales/commercial support, and customer service centres.

Technology enablement during bankruptcy or emergence is uncommon.
Among the companies surveyed, roughly a third or less used technology such as enterprise resource planning (ERP), cloud, and automation to enable their customer service centres (34 per cent), technology/IT (32 per cent), finance (32 per cent), and/or supply chain functions (28 per cent). Technology enablement in other parts of the business was even lower.

Technology implemented during bankruptcy is more for reporting and analytics than for transformation and modernisation.
The top focus area for technology implementation was financial reporting and analytics (58 per cent), followed by reporting and analytics for risk (34 per cent) and reporting and analytics for business/management (30 per cent). Implementation levels were significantly lower for transformational technologies such as cloud (22 per cent), IT modernisation (22 per cent) and enterprise data management (20 per cent).

Most companies do not identify and rationalise their most- and least-profitable customers.
The majority of respondents (56 per cent) did not make substantial progress at identifying their most- and least-profitable customers, potentially leaving the business challenged for sustainable post-emergence profitability.

Growth actions in general are not common.
Although various forms of profitability analysis did not receive much attention during bankruptcy or emergence, they were the most common growth-related actions (38 per cent). Other growth actions received even less attention, particularly sales force incentives (8 per cent), international growth (16 per cent), marketing and advertising (16 per cent), and commercial excellence programmes (16 per cent).

Most companies in bankruptcy do not adequately address talent issues.
The survey results reinforce the theme that talent issues are generally not addressed adequately or at all during bankruptcy. Only 16 per cent of respondents felt they did very well at putting an effective executive team in place, a likely outcome given the inherent difficulty of attracting new talent during bankruptcy. Human capital decisions are usually addressed post-emergence.

Emergence Playbook

In a conventional bankruptcy, the preferred time to think about making the business stronger is during the bankruptcy process, not waiting until after emergence. In bankruptcy, a company has unique opportunities to focus on the more profitable aspects of its business and create a stronger foundation for healthy, sustainable growth. And while there are certainly situations where consensus cannot be achieved on a company’s strategic plan, or even on the correct timing to bring in transformational advisors or initiate transformational change (given the uncertainty around the final bankruptcy outcome), it is essential to have an established playbook for post-bankruptcy planning and success.

The following practical emergence playbook can help bankrupt companies quickly develop effective strategies, plans, and business/operating models that address all five core performance dimensions: capital, cost, growth, technology, and talent. Of those five dimensions, the two that vary most widely, and therefore determine which playbook approach is applicable, are technology and capital.

Technology: In some situations, profitable and sustainable growth can be achieved through traditional mechanisms such as organic growth, market expansion, and acquisition (an “Emerge to Grow” model). In other situations, profitable and sustainable growth can only be achieved through longer-term technology transformation, using innovative technologies to dramatically improve a company’s performance and competitiveness (an “Emerge to Transform” model).
Capital: Under either model, an emerging company might need to closely manage its liquidity and capital needs, particularly credit availability, before it can consider an aggressive growth or transformation strategy.
The resulting emergence playbook features four different approaches that increase in complexity, risk, and duration depending on a company’s need for technology transformation and/or capital (figure 1). Each of these approaches provides a valuable starting point for post-bankruptcy planning that fits a company’s unique needs and ultimately can help it emerge from bankruptcy positioned to achieve profitable and sustainable growth.

Moving forward

The bankruptcy process has many legal and practical limitations and may not position an emergent company to realise its full potential post-bankruptcy. However, since companies that undergo bankruptcy are taking the necessary and challenging steps to realign their businesses and maximise value for stakeholders, it is important for them to emerge stronger and healthier. The findings from this study can help stakeholders make more informed decisions and challenge commonly held assumptions and norms about bankruptcy that might not be relevant to their situations, using the insights and lessons learned to achieve the best possible outcomes during and after bankruptcy.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate risk, and resolve disputes – financial, legal, operational, political and regulatory, reputational, and transactional. FTI Consulting professionals located in all major business centres Consulting, Inc. All rights reserved. www.fticonsulting.com

This article was originally published on 2 December 2022.

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About the Author

Omar Aguilar is Enterprise Transformation Practice Co-Leader and Business Transformation Energy and Industrials Leader at FTI Consulting, Inc. and focuses on broad and rapid enterprise transformation efforts, and on providing innovative and lasting solutions to clients at the CEO and board levels, in the US and globally, when their more important issues are at stake. Omar’s areas of expertise include strategic cost transformation, margin improvement, restructuring, turnarounds, disruptive cost strategies, broad enterprise transformations, and business model transformation enabled by “save-to-turnaround”, “save-to-grow”, and “save-to-transform” strategies to achieve sustainable results.

Robert Del Genio is the Co-Leader of the Corporate Finance and Restructuring segment’s New York Metro Region and specialises in advising companies, lenders, creditors, corporate boards, and equity sponsors across a diverse range of industries both domestically and internationally. Robert is a recognised leader in restructuring and mergers and acquisitions with over 35 years of experience.

Christopher Ittner is the EY Professor and Chair of the Accounting Department at the Wharton School of the University of Pennsylvania, and Co-Managing Editor of Management and Business Review. He received his Doctorate in Business Administration from Harvard University. Christopher’s work focuses on the design, implementation, and performance consequences of performance measurement and cost management systems. He is the recipient of the American Accounting Association’s Notable Contribution to Management Accounting Literature Award.